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Q & A with America's Real Estate Professor: Home warranties

Find out whether it's better to ask for a purchase credit instead of the warranty.

Zillow

Jun 11, 2013

Q. I’m under contract for a property and the seller offered a home warranty with the sale of the property. The property and all appliances are newer so I’m guessing I won’t need to make a claim on the warranty policy. Would it be better to ask for a purchase credit instead of the warranty? Jeffrey N. Charleston, S.C.

A. Congratulations on getting a property under contract, since most people are having trouble doing that in this very tight inventory market.

Home warranties help cover the cost to repair or replace items that break, if they are covered under the home policy that is purchased. While it is true that newer houses and newer appliances generally have fewer repair needs, most appliances only come with a one-year warranty and do sometimes fail and can cost a lot to repair.

Whether you want a purchase credit or warranty is a personal choice because neither of us will know if something in your new house will break. If you are really tight on cash, it is probably a good idea in case something does break. If you have enough cash to handle most issues, it’s probably not as important, especially since your place is newer.

I would alert you that there are sometimes misunderstandings of what is covered under the warranties. Make sure you know exactly what is covered under the plan offered by the seller as there are basic and more comprehensive plans too. Hopefully they are buying a sufficient plan to cover all the particulars (e.g., air conditioning) in your house.

Finally, talk to your home inspector and find out his opinion during your inspection, as he is really the best expert to guide you on what to expect with repair needs for all the items covered under the policy.

Retirement Investing Diversification

Q. I’m recently retired and have a couple of rental properties and about $100,000 in retirement savings that I take distributions on of about 5% per year. I am thinking of using those retirement savings to buy another rental property. I think I can make a pretty good property purchase because my brother has done well on real estate and will help me, but I really don’t want to lose my money in case the real estate market takes a nose dive. Any thoughts? Ann, J. Orange Park, Fla.

A. First up, you should talk to a fee-only financial advisor about your whole retirement picture, how much monthly income you need to survive, how much monthly income you have, and how long it will last. It seems like you are considering putting all your retirement eggs into real estate assets. And that might not be a good idea as most financial advisors are going to suggest diversifying your retirement portfolio.

If your two other properties provide sufficient consistent cash flow to live on, you are comfortable being a real estate owner, your retirement advisor seems to think it is a good idea, and you have sufficient other savings for a rainy day ; then it might make sense for you to convert your retirement funds into a real estate investment. You can do this via a self-directed IRA. Talk to a tax advisor and self-directed IRA custodian and fully educate yourself on the rules, regulations, laws, positives and negatives of these.

If you are going to buy more real estate, make sure to buy a cash-flow positive, lower risk, and better condition property so as to hopefully minimize your hassle and time needed to manage your investment. Good luck!